Why are we in debt? Tax cuts, recessions, wars

Commentary: There has been no spending binge by Obama

WASHINGTON (MarketWatch) — The federal government’s finances would be in great shape today if only we’d managed to stay out of a couple of wars and a couple of recessions, and if we hadn’t foolishly cut tax rates.

The story Republicans like to tell about the deficits — that it’s all due to a “spending binge” under President Barack Obama — doesn’t hold up if you do the math.

In reality, most of the debt racked up in the past 10 years and most of the debt we’ll rack up in the next 10 years is due to two recessions, two wars and some bad decisions made before Obama ever took office.

The federal deficit is being driven by four main factors: Tax cuts, the Great Recession, the stimulus and the wars. Nothing else really matters.

The only spending binge we’ve been on is to fight a couple of wars and a couple of recessions, and to pay for seniors’ prescription drugs.

Discretionary spending for the other things government does — the stuff Republicans want to cut to the bone, like college scholarships, environmental protection and cancer research — has barely budged in the past 10 years. Nondefense discretionary spending didn’t cause the deficits of the last decade, and they won’t cause the deficits of the next five decades, but that‘s where the Republicans have set their sights.

This isn’t a matter of scoring political points, or of diverting the finger of blame away from Obama and toward someone else, be it George W. Bush, Osama bin Laden, Alan Greenspan, or Bill Clinton. It’s vital that we understand where the debt came from if we’re ever going to figure out how to bring it under control.

Looking forward over the next 20, 30 or 50 years, we’ve got some major budgetary challenges, mostly because the population is aging, and those older Americans will expect the health care and retirement benefits they’ve been promised and have been paying payroll taxes for. Those fiscal challenges would be a lot easier if we hadn’t already dug ourselves into a $17 trillion hole, which is what the publicly owned debt is expected to be in 2020.

Here’s something that may surprise John Boehner and the rest of the Republicans who say that raising taxes cannot even be discussed in relation to balancing the budget:

Almost all of the increase in the public debt since 2001 can be attributed to just one factor: lower revenue.

The debt held by the public has grown by $6.24 trillion since 2001. Over the same time period, federal revenues have fallen short of expectations by almost the same amount — an estimated $6.22 trillion — primarily due to various tax cuts and two recessions, according to report released last week by the Congressional Budget Office. Read the CBO report on changes to its projections since 2001.

We’ve got a big debt not because the government has been on a spending binge, but because the economy has been pathetic. Weak economies destroy public finances, because revenue automatically fall at the same time that spending automatically rises for things such as unemployment benefits, food stamps and Medicaid. The fiscal costs of recession can be even higher if the government attempts to lessen the downturn by cutting tax rates or deliberately increasing spending.

Republicans who say the huge public debt has created a weak economy have it exactly backwards: It was the weak economy (and the response to that weakness) that created our federal debts.

The Great Recession alone will add an estimated $5.5 trillion to the federal deficit by the end of the decade. These costs include not only the reduced revenue, the automatic spending increases, the deliberate stimulus, and the bank bailouts, but also the 2010 tax cut, and the cost of paying interest on all that extra debt.

The recession of 2001 also cost trillions, mostly because the recession provided the political opening to slash taxes for an entire decade.

It may be hard to believe it today, but 10 years ago, the biggest fiscal challenge Congress faced was what to do with a projected $5.6 trillion fiscal surplus. Newly selected President Bush said the surplus should be returned to the people who had paid too much in taxes. Democrats thought the expected surplus should go to shoring up the finances of Social Security and Medicare.

Bush would not have been able to get his tax cuts past the Senate in 2001, except for one thing: The economy fell into recession, and the tax cuts were repackaged as a way to stimulate the economy back to health. Further tax cuts in 2002 and 2003 were also sold as anti-recession medicine.

Those tax cuts were designed to be automatically repealed at the end of 2010, but, once again, the weak economy persuaded a sufficient number of Democrats to vote to extend them. If these tax cuts are extended again in 2012 (as many now expect), they could end up costing the Treasury more than $5 trillion in lost revenues by the end of this decade, including the cost of paying interest on that extra debt.

The other big reason for the deficits is the endless war on terror. The wars in Iraq and Afghanistan and increased security spending have cost a conservatively estimated $1.3 trillion so far, and will cost $2.5 trillion by the end of the decade, according to a study by the Center on Budget and Policy Priorities released last week. Read the CBPP report on the deficits.

All told, the economic downturns, the tax cuts and the wars will contribute about $12.6 trillion to the public debt by 2019, which is almost exactly how much the debt will grow, under the most realistic assumptions, CBPP figures.

In the long run, the debts will be driven by spending on health care. We need to resolve that. But, for now, the best thing for us to do is to reverse the sources of red ink: End the wars, let the Bush tax cuts expire, and fix the economy.

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